UK inflation held steady at 3.8% in September, marking the third consecutive month at that level and delivering a welcome upside surprise for both markets and consumers. The breakdown showed food inflation easing further and price pressures moderating in recreational categories. Core CPI (which excludes the volatile components such as food and energy) edged down to 3.5% year-on-year from 3.6% in August, while services too remained unchanged. All measures of inflation came in below expectations, and policymakers are signalling that this could mark the peak before a sustained decline. As a result, economists now see scope for interest rate cuts to return to the policy agenda – though likely not until next year, given inflation remains well above the Bank of England’s 2% target.
A wave of Chinese economic data released on Monday gave markets plenty to unpack. GDP expanded by 4.8% year-on-year in the third quarter, easing slightly from the 5.2% pace recorded in Q2. Despite this mild slowdown, the figure topped consensus expectations, thanks largely to a rebound in industrial output. That strength helped offset weaker momentum in consumer activity (retail sales grew 3% in September, down from 3.4% in August) as well as the prolonged housing sector slump that has somewhat eroded household wealth over recent years. Although the data provided a welcome lift to market sentiment by keeping China broadly on track to meet its 5% full-year growth target, investor attention is now shifting to the upcoming Five-Year Plan update later this month for any concrete policy signals to stimulate domestic demand – particularly with inflation still running in deflationary territory.
Japan has appointed its first female prime minister, Sanae Takaichi, a staunch advocate of ‘Abenomics’ and its bias toward fiscal expansion and tax relief. She enters office following internal political turbulence that prompted the ruling LDP to form an alliance with the Japan Innovation Party in order to stay in power. Even so, her administration may still face fragility unless it secures broader parliamentary backing in the months ahead. Financial markets responded with measured optimism: the Nikkei closed at a record high on Tuesday, the yen weakened sharply, and government bonds rallied.
Meanwhile, reports surfaced Monday detailing a tense conversation between President Trump and President Zelensky last Friday after Trump suggested that current front lines in the Russia–Ukraine conflict should effectively become the permanent territorial boundary – implying that Kyiv should relinquish occupied territory to Moscow. Although the meeting was ultimately described as constructive, investors are now watching with hope for a possible follow-up summit between Trump and President Putin, which has been reported as shelved for the time being.
Looking ahead, focus turns to Friday’s U.S. CPI release. The data (delayed by the ongoing government shutdown) is expected to be one of the few key inputs available to the Federal Reserve ahead of next week’s policy meeting. Consensus forecasts point to a 3.1% year-on-year inflation reading, and markets are currently pricing in another 25 basis-point rate cut in October. We also have UK retail sales, Japan’s inflation reading and Eurozone PMI data.
Nicola Tune, Portfolio Specialist
